Do you manage your money like a millionaire?

Key Takeaways

There are approximately 10.4 million Americans today worth 1 million or more.

Many millionaires are surprisingly frugal and avoid both lifestyle inflation and wasteful spending.

Tax efficiency, hard work and smart investing are other money management traits most millionaires share.

So you want to be rich? In order to join the millionaires’ club – and not get booted out because you went broke spending all your money – you’ve got to develop money smarts. The rich don’t stay rich by spending frivolously and being obsessed with beating the Joneses’.

Curious just how many millionaires there are in the U.S. today? The number of millionaires is growing. Last year, 300,000 newbies joined the millionaires’ club, despite volatile markets and sluggish economic growth. Their numbers bring the total tally of Americans with a six-figure net worth or higher to 10.4 million.1

Now that you’re chomping at the bit to join them, here are some money management essentials you may want to keep in mind to master like the millionaires do.

Lifestyle inflation not in the playbook of staying rich

Wealth experts report that many multi-millionaires choose not to bump up their lifestyles as their wealth grows.2 Wealthy people are often surprisingly frugal. If you were hoping to buy a brand new wardrobe of designer clothes, a gold plated private jet or a mega mansion when you reach the six-figure mark — sorry, but your millionaire pals would disapprove.

Forget about showing off. Consider putting a larger amount of your income into building assets and investments as your earnings increase. You may also want to focus on actively growing your wealth instead of just jogging in place. Your new wealth manager may also advise you of avoiding exorbitant and unnecessary spending. If you want a happy, worry-free retirement, use your extra money to make more money while time is on your side.

Not even Warren Buffett upgraded his primary residence after earning his oodles of riches. He purchased his house in 1958 for only $31,500 – which was well within his price range at the time – and still lives there to this day. When asked about his home, Buffett joked, “I would have made far more money had I instead rented and used the purchase money to buy stocks.”3 If you want to follow in his footsteps, pass on upgrading your home and invest as much as you can into the stock market.

Get efficient with taxes already

If you plan to be a millionaire, expect to pay a decent chunk of money in taxes. Uncle Sam is thrilled you want to make more money. If you learn the tax laws, however, you can use them to your advantage and manage your tax liability effectively. Uncle Sam can only shrug if you do that and hope other people won’t be so astute.

Weave fundamental tax saving strategies into your lifestyle. Contribute to tax-favored accounts such as 401(k)s, traditional IRAs and 529 plans to save on taxes. Consider investing in tax-exempt bonds such as munis and benefit from diversifying your portfolio into bonds while you’re at it.

Harness tax-loss harvesting by cutting your losses on depreciated positions that no longer fit your investment strategy. This can help you reduce the amount in capital gains taxes you owe the IRS on your profitable investments.

Write off eligible investment expenses such as computer equipment you’ve purchased to trade and manage your investments. You may also be qualified to deduct other investment expenses such as legal and professional fees related to your investments, safety deposit box fees for exclusive storage of documents regarding your investments and travel costs incurred to manage your investments.

Don’t get so excited you start to assume everything investment related is deductible, however. Travel expenses for shareholders meetings and seminars are not deductible. In addition, broker fees and trading commissions can’t be deducted immediately. They must be capitalized and added to your investments’ cost basis.4

Impulse buys are for the “thousand-aires”

Many millionaires are rich because they are super careful about how they spend their money and recognize the difference between wants versus needs.

The rich have no shame buying generic products and sticking with discount retail stores. Can anyone really tell the difference between a $2,000 suit and a $300 one if they can’t see the label? Those with a weakness for jewelry can still sparkle to the nines by renting some diamond studded bling online without the red carpet price tag.

For anyone who passes on $1,500 in gadgets or clothes this year and invests that money instead, he or she could turn that into $261,500 in 40 years at a 6 percent annual rate of return. Invest $10,000, instead of spending it on a 1-carat diamond solitaire necklace, and you could land more than $1.7 million in 40 years.5

Smart career moves

A study by Spectrum Group on investors worth $25 million or more found that the top two contributors to great wealth are hard work and education. Eighty-seven percent of the wealthy participants attribute their success to hard work. Only 30 percent said inheritance played a role in their riches.6

Education is well regarded in the workplace and can help increase people’s chances of achieving a senior role with top compensation. It would be smart to know your worth. If you are a valuable employee who adds significant value to your employer, a common advice from career coaches is: don’t be afraid to try and negotiate higher compensation.

Those with a knack for business may also consider starting a company. Sixty-two percent of the super rich are self-made.7

Smart investing; “good” versus “bad” assets

One of the most important ways to manage money like a millionaire is smart investing. Although cash may be king in volatile markets, hold cash too long and you may lag behind inflation. Part of money management is understanding the care and feeding of cash balances in your accounts so you can put your money to work.

Do you have an investing strategy? If you’re uncertain where to start you can consider dollar-cost averaging and work towards building a defensive portfolio. Once you identify your investing goals, finding an allocation mix that meets your needs and contributing to your accounts regularly often come next.

Bear in mind some forms of investing are superior to others. Millionaires focus on investing in “good” assets. At their most basic, good assets earn a positive cash flow while the bad ones cost you money or choke your cash flow. Cars are typically bad assets because they depreciate in value the moment they leave the dealer’s lot and require regular feeding, such as insurance, gas and maintenance. You might have some fancy wheels to drive in, but they’ll cost you.

On the other hand, examples of good assets can include rental properties, dividend paying stocks, bonds and private equity. Think like a millionaire often means seeking investments that have the potential to generate positive cash flow during their lifetime. The rich tend to get richer by investing in good assets in a repetitive loop.

Now that you’re armed with the knowledge of how millionaires manage their money, is it time to build your own empire?

Motif Investing offers flexible investment products and services that help you prepare for retirement and build wealth. Find out today how Motif Investing can help you achieve your financial goals.

Frank, Robert, “Record number of millionaires living in the U.S.,” CNBC, March 7, 2016.

Clifford, Catherine, “62 percent of American billionaires are self-made,” Entrepreneur, January 14, 2016.

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